How to save for college and retirement at the same time

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As the cost of a university education increases every year, many parents are worried about how they will pay for their child’s education. Investing for your child’s college fund can be especially difficult when you have competing financial priorities, like investing for retirement or paying for immediate needs like child care.

You might also want your kids to take some of the financial responsibility for their education, but at the same time, you don’t want them to be struggling with student loan debt their entire lives. How should parents balance these different priorities? Is it wise to choose your child’s college education over building your retirement nest egg?

Select spoke with Mark Kantrowitz, higher education expert and author of How to Appeal for More College Financial Aid as to whether parents should prioritize helping their children pay for their college education or focusing instead on investing for their own retirement.

Why you should prioritize a college fund over retirement

Many personal finance experts use the flight attendant metaphor to determine whether to prioritize saving for education or retirement: If you’re on a plane and an emergency happens, Flight attendants recommend that you put on your oxygen mask before helping your child put on theirs. The idea is that parents should prioritize money for their own retirement before investing for their child’s college education.

It seems like a reasonable plan. After all, you can’t take out loans for retirement (although there is something called a reverse mortgage that allows people to borrow for retirement), but you can take out loans for college. .

However, Kantrowitz thinks the flight attendant analogy is misused.

“The reality is that these arguments often assume that the debt is swept under the carpet [and] that someone other than the parents is going to pay off that debt, “Kantrowitz says.” If you assume that the parent is going to pay off the parents’ loans, it is cheaper to save [now]. “

If parents need to repay some or all of their child’s student loans in the future, they should prioritize a contribution to their child’s college fund, even if that means putting less for their retirement accounts. .

Ultimately, saving now for college can also help you save more money in the newspaper. Any money you invest now will earn interest, while any money you borrow in the future will have to be paid back with interest.

On average, every dollar you borrow for college will end up costing you twice as much, says Kantrowitz. Repaying (or even paying only a portion of) your child’s student loans could end up costing you hundreds or thousands of dollars that could have been allocated when you retire.

How Much Student Loan Debt Should You Take?

“If parents don’t plan to repay their child’s student loans, they should ensure that the child limits their student loan to a reasonable amount that they can afford to repay,” Kantrowitz explains. “If the total student loan debt at the time of graduation is less than their annual income, the student should be able to pay off their student loan in 10 years or less.

For parents who plan to repay their child’s student loans, Kantrowitz recommends this general rule: you need to borrow less for all of your children than your combined annual income.

For example, if your combined annual household income is $ 150,000 and you have three children, you should not have more than $ 150,000 in student loans, in total, for all of your children (assuming they are are close in age). By keeping debt levels low, parents should be able to pay off their child’s loans in less than 10 years. If parents are closer to retirement (about five years later), they should not take more than about half of their annual income in loans.

When should you make sure to prioritize retirement savings?

Kantrowitz notes that there is a case where parents should absolutely prioritize their retirement, whether or not they plan to pay for their child’s education.

“If your employer offers to match your contributions to your pension plan, you should always maximize the match because it’s free money, especially in terms of impact on your return on investment. It’s a dollar-for-dollar consideration, and it’s 100% return on investment there, ”says Kantrowitz.

An account that can do both

While 529 savings plans are one of the best investment options for parents who want to save for their child’s education because of the tax benefits they offer, there is another investment vehicle to consider. Parents who want to prioritize investing for retirement can also use money from their Individual Retirement Accounts (IRA) to help fund their child’s college education.

Normally, if you withdraw investment gains from an IRA (either a Traditional or a Roth) before you are 59 and a half, you will have to pay a 10% penalty. (Note: You can withdraw your Roth IRA contributions early without paying any penalties or taxes.)

However, if you withdraw your investment earnings from a Roth IRA that has been open for five years or more, you will not have to pay a 10% penalty or income tax if you use the money for expenses. qualified higher education.

And for Roth IRAs that have been open for less than five years and traditional IRAs (the 5-year term does not apply to traditional IRAs), you won’t have to pay a penalty fee, but you may have to. be paying federal fees and state income tax for education expenses. Eligible higher education expenses include tuition, fees, books, and supplies.

If you’re looking for a company that offers retirement and college investment accounts, you might want to consider Wealthfront, which offers 529 savings plans, individual retirement accounts and one robo-advisor investment vehicle.

Wealth front

On the secure Wealthfront site

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle chosen. Minimum deposit of $ 500 for investment accounts

  • Costs

    The fees may vary depending on the chosen investment vehicle. No account, transfer, transaction or commission fees (fund ratios may apply). Wealthfront’s annual management advisory fee is 0.25% of your account balance

  • Premium

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources, and dividend-paying stocks

  • Educational resources

    Offers free financial planning for college planning, retirement, and home buying

If, however, you are just looking for a 529 savings plan, most 529 savings plans are state sponsored. You don’t need to be a state resident to subscribe to their 529 savings plan, but you can get a tax benefit if you are a state resident.

Finally, if you just want a retirement account, there are several companies to choose from such as Charles Schwab, loyalty and Avant-garde. When looking for a retirement account, you’ll want to look for one with low fees and a variety of different investment options so that you can build a diversified portfolio.

Fidelity Investments IRA

Information about Fidelity Investments IRA has been independently collected by Select and has not been reviewed or provided by Fidelity Investments prior to publication.

  • Minimum deposit

  • Costs

    $ 0 commission fee for stock and ETF transactions; $ 0 transaction fees for over 3,400 mutual funds; $ 0.65 per options contract

  • Premium

  • Investment options

    Stocks, bonds, mutual funds, CDs and ETFs

  • Educational resources

    Tools and calculators that show users the progress of their retirement goal; Fidelity Five Money Musts online game to teach you how to manage your money in the real world

Final result

When it comes to deciding whether it’s more important to invest for your child’s education or retirement, you might be tempted to take traditional personal finance advice and choose to contribute to your future instead. than that of your children. However, this might not be the best option. If you plan to pay off (some or all) of your child’s student debt after graduation, you’re better off saving for college than for retirement.

Still, your top priority should be to maximize your employer’s 401 (k) match, as you don’t want to leave free money on the table.

Ultimately it comes down to personal decisions (as it often is with personal finance), so consider all of your options. Whatever you choose, the earlier you start the better.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.


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